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Tel: (02) 8424 8800 | 15 Mount Street, North Sydney NSW 2060 | PO Box 2006 North Sydney NSW 2059 Carnival plc trading as Carnival Australia | ABN 23 107 998 443. 2TA 5580

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6 May 2016 Independent Pricing and Regulatory Tribunal Level 15, 2-24 Rawson Place Sydney NSW 2000 Dear Tribunal,

Re: Submission – Maximum Fees and Charges for Cruise Ships in Sydney Harbour Carnival Australia (Carnival) is pleased to make this submission to the Independent Pricing and Regulatory Tribunal (IPART) in response to the Issues Paper on the review of cruise ship site occupation charges. Carnival Australia is responding on behalf of the seven brands it operates and/or represents in Australia – P&O Cruises Australia, Princess Cruises, Carnival Cruise Line, P&O Cruises World Cruising (UK), Cunard, Seabourn and Holland America Line. Attached please find Carnival’s submission, which seeks to further explain the dynamics of the global cruise shipping industry and outlines our views on the matters raised in the Issues Paper. Carnival Australia is committed to assisting IPART with its review. Should you need any further information, please contact Sandy Olsen on 8424 8876 or [email protected] Yours sincerely,

Ann Sherry AO Executive Chairman

Tel: (02) 8424 8800 | 15 Mount Street, North Sydney NSW 2060 | PO Box 2006 North Sydney NSW 2059 Carnival plc trading as Carnival Australia | ABN 23 107 998 443. 2TA 5580

6 May 2016

Submission to NSW Independent Pricing and Regulatory Tribunal on Maximum Fees and Charges for Cruise Ships in Sydney Harbour

-2- Carnival Australia IPART Submission

1 Executive Summary

Overview

Carnival Australia (Carnival) is pleased to make this submission to the NSW Independent Pricing and Regulatory Tribunal (IPART) in response to the Issues Paper on Maximum Fees and Charges for Cruise Ships in Sydney Harbour.

Carnival Australia is the region’s major cruise company and is making this submission on behalf of seven of the most recognisable cruise brands in the world - P&O Cruises Australia, Princess Cruises, Carnival Cruise Line, P&O Cruises World Cruising (UK), Cunard, Seabourn and Holland America Line.

In this context, Carnival Corporation and plc’s ships represent about 70% of the market in Australia and New Zealand. We remain the only company to cruise ‘year round’ from Sydney – in other words, we are the only company with ships physically based from Sydney across the entire calendar year.

For more than 80 years, ships from our home brand, the industry leading P&O Cruises, have sailed to the South Pacific from Australia and our international ships have helped to make Australia one of the premier cruising hubs in our region.

To drive growth, the industry, and particularly Carnival Australia, has invested heavily in Sydney and grown demand both domestically and internationally over that period. It is worth noting that it is almost 10 years since Cunard’s first Royal Rendezvous in Sydney Harbour, which brought the city to a standstill.

The industry has experienced double digit growth every year for at least the past 10 years. It contributes at least $3.6 billion to the economy and supports the equivalent of more than 15,000 Full Time Equivalent employees. The majority of the economic contribution relates to cruises from Sydney Harbour.

Published figures from the industry show that Australia’s cruise industry passed an important milestone in 2014 when for the first time it exceeded one million Australian cruise passengers taking a cruise somewhere around the world in a calendar year.

In reaching the one million passenger mark – well ahead of the original 2020 goal – Australia has maintained its position as the world’s leading cruise market in terms of growth. Australia’s expansion once again outpaced all other key cruise source markets.

Carnival Australia’s figures (unpublished) for this year demonstrate that we are edging towards the one million passengers cruising from Australia on our main brands alone.

As an industry, we have achieved this growth through our own investment (including in brand marketing and destination marketing both domestically and internationally) without government subsidy or investment.

IPART’s involvement in this review offers prospects to improve the transparency of Port Authority of NSW (PANSW) costs and the efficient delivery of port services in Sydney Harbour. It also offers the opportunity to benchmark port costs globally to ensure Sydney ports provides a competitive pricing structure.

Carnival Australia is concerned to ensure IPART’s proposed approach for site occupation charges considers the significant investment made in the Australian cruise market and, importantly, secures certainty and stability around port access and port pricing over the long term.

Sydney is Australia’s cruising hub. It is the ‘anchor’ port for cruising around Australia. If ships can’t/don’t cruise from Sydney, the impacts will be felt in every State around Australia, including the more than 20 regional destinations that we visit around the country. Port access and port pricing in Sydney is of national interest. While IPART is a NSW Government agency, the impact of this review extends well beyond Sydney and NSW.


The NSW Government has two other interdependent reviews underway: (1) a port booking process, and (2) a long-term cruise plan that will consider infrastructure investment. Our expectation is that the IPART review is not seen in isolation from the two other reviews.

In many ways, the significance of this pricing review is amplified by the fact that there is only one main cruise berth in Sydney Harbour that can accommodate large ships, which risks distorting the market.

In summary, our key views are:

Sydney is already an expensive port by global standards with key ports in the US, NZ and Europe

presenting port costs 30 to 50% lower than that of Sydney.

Passengers (adults and children) each pay about $130 in taxes and charges before they step foot on a

ship for their holiday.

The Site Occupation Charge, our second highest port-related charge, has already increased by 900%

in 3 years.

Cruise shipping is a truly global business with mobile assets deployed to meet best market

conditions. Ports with substantially higher fees and charges will likely, over the long term and

without any adjustment, lose ground to more cost competitive ports. This will have economic

impacts on the respective cities and local economies. The differences in economic benefits could

well exceed the differences in port fees.

The cruise shipping operators require pricing certainty to support sustained investment over the long

term. A five year cycle is considered short term for an industry which is planning at least five years

out (particularly with new ships). It also publishes itineraries about two years in advance.

There is no precedence globally for a regulatory approach to set prices for access by cruise ship

operators to port infrastructure

IPART should follow global practice and support a pricing model underpinned by direct negotiation

and long term contracts between cruise ship operators and the Ports Authority. This is the accepted

approach in major ports around the world.

Such an approach also provides certainty to the Port Authority of long-term and stable returns, in

essence ‘de-risking’ their business model so they do not have to consider volatility.

An ‘auction system’ for port bookings is not deployed anywhere else in the world and comes with

inappropriate complexity in cruise itinerary planning and increased volatility.

A normal return should not be sought on the investments in White Bay because of the terminal’s

short lifespan and therefore likely low future utilisation.

PANSW should not prescribe a value to cruise terminal land given there are no current alternatives

for cruise infrastructure.

We are confident that both IPART and the Government are committed to robust analysis of these complex issues, we caution, however, against excessive interventionism when it comes to setting site occupation charges and other related, ancillary fees.

In this context, Carnival Australia believes that Government’s central role is not in price-setting but rather in establishing the conditions to allow fees and access to be negotiated in a free market. This provides for the long term certainty, highly valued by both cruise ship and port operators, and creates the conditions which maximise the impact of the cruise industry on the local economy in relation to its ability to pay for port infrastructure and services.


2 Background

About Carnival Australia

Carnival Australia is the Australian branch of Carnival Corporation & plc, which is the world's largest leisure travel company with a portfolio of 10 distinctive cruise brands and a fleet of more than 100 ships covering North America, Europe, Australia and Asia.

In Australia, Carnival Australia operates and/or represents seven of those iconic cruise brands - P&O Cruises Australia, Princess Cruises, Carnival Cruise Line, P&O Cruises World Cruising (UK), Cunard, Seabourn and Holland America Line.

Carnival Corporation has 16 new ships scheduled to be delivered between 2016 and 2020 including the first ever new ship built specifically for the Australian market. P&O Cruises Australia will take delivery of the new ship in 2019, which will homeport from Australia all year round and carry 4,200 passengers.

This is a major milestone for the Australian cruise industry and represents a significant investment in this market.

Through P&O Cruises Australia, we have operated home ported ships out of Sydney for 80 years. Carnival Australia is the only cruise ship company in the world to use Sydney as a home port all year round. Our main homeported brands are P&O Cruises Australia, Princess Cruises and Carnival Cruise Line.

Holland America Line sails seasonally and the other brands, such as Cunard, P&O UK and Seabourn, cruise to Sydney on world voyages each year.

In 2016 the Carnival group will deliver 278 ship calls to Sydney carrying more than double the amount of guests into Sydney than any other cruise company.

Economic contribution of the cruise industry & the strategic importance of Sydney

Australia’s cruise industry passed an important milestone in 2014 when for the first time it exceeded one million Australia cruise passengers taking a cruise somewhere around the world in a calendar year. In reaching the one million passenger mark – well ahead of the original 2020 goal – Australia has maintained its position as the world’s leading cruise market in terms of growth.

Overall numbers rose by 20.4 per cent to 1,003,256 passengers. Australia’s expansion once again outpaced all other key cruise source markets.

Australia also set a new global benchmark with a market penetration rate of 4.2 per cent, up from 3.6 per cent in 2013. This is the first time a region has broken through the 4 per cent barrier, with Australia extending its lead on the established North American market, which in 2014 achieved 3.4 per cent market penetration.

The majority of Australian cruise passengers continue to take voyages close to home, with Australia, New Zealand and the South Pacific collectively accounting for 67 per cent of total passenger numbers in 2014.

Of the three, Australia showed the strongest growth with a 28 per cent increase in numbers.

That’s 671,030 Australian passengers cruising in our immediate region and 189,796 Australians cruising domestically.

This 2014-2015 data demonstrates that the cruise industry is a growing contributor to the Australian economy and regional Australian economies.

In addition, Sydney and NSW benefit from significant economic externalities as a net importer of interstate and international passengers with approximately 45% of Carnival passengers sailing from Sydney coming from states other than NSW.


3 Our perspective

We interpret IPART’s term of reference as being primarily focused on efficiency while ensuring PANSW’s continuing commercial viability (the site and investments on site are largely a sunk cost). Efficiency as it pertains to site occupation is fundamentally concerned with allocative efficiency.

Excessive charges help bring about inefficient outcomes. Charges should not over recover and, in the interests of the industry sustainability, it is important that they are competitive with other ports around the world.

Achieving allocative efficiency under these circumstances is closely associated with ensuring charges, and the formula by which they are determined, deliver stability, certainty and signals for investment by the cruise industry.

With regard to non-site occupation services the focus is to ensure that there are no cross-subsidies between site occupation and other port charges.

Negotiated approach and long term contracts are considered the norm

Carnival Australia is concerned with the regulatory approach and building block methodology where a regulatory authority sets the maximum price that can be levied. As a company calling at more than 700 ports around the world, Carnival is not aware of this approach being used in any other port globally and we have concerns about its application in Sydney.

While PANSW is a monopoly provider, negotiated price contracts between cruise ship and port operators prevail in virtually all of the ports we operate in overseas, including where there is no competitive tension.

Site occupation charges relate to an asset which is a long-lived and strategic by its nature. In most cases international models provide for commercial negotiation between the cruise ship operator and the terminal owner/operator for access to cruise terminals.

Generally, agreements with port operators reflect the port’s status as a strategic asset and as a gateway for the generation of jobs and economic activity, and address access management, port infrastructure and services pricing and include scope for input or co-investment for future developments. Such contracts can be for periods of 15 to 25 years, with options to extend by 5-10 years up to a maximum of 60 years in some cases. The negotiated approach is welcomed by both cruise ship and port operators as it provides long term certainty and creates the conditions for sustained investment and growth of the local economic value the cruise industry delivers.

Carnival supports the option of negotiating a long term arrangement for access to the cruise terminals in Sydney Harbour. These contracts would be determined with a view to ensuring cost recovery is no more than PANSW’s efficient costs and competitive charges when compared to ports in other locations around the world. We consider a negotiated approach would provide us with certainty of access which is otherwise absent under the current regime, stability and visibility of charges over the long term, greater influence over future developments to ensure they meet industry requirements and underpin improvements to local infrastructure to support industry growth and sustainability. The system put in place will determine the growth or otherwise of the industry and the flow-on benefits cascading from a long value chain supporting many businesses and primary producers.

Such an approach also provides certainty for PANSW and reduces its risk of volatility.

We would caution that any such a model must include safeguards to prevent abuse of market power by the monopoly terminal operator and we would ask IPART to consider the role for an independent arbiter in this context.


As a framework, the proposed building block approach does not adequately meet Carnival’s requirements and expectations around certainty of access and stability and reasonableness of port infrastructure and services pricing.

Essential service methodology not appropriate to cruising

Carnival understands that the regulatory building block approach proposed by IPART is generally used for regulating prices for essential services such as electricity networks and water infrastructure. Cruising is not, however, an essential service. Demand for cruising relies largely on discretionary income and is therefore very sensitive to price, significantly more so than for electricity and water.

As a capital intensive industry operating with low returns, recovering the cost base is a constant challenge, particularly given external cost volatility and foreign exchange exposure. Carnival believes the regulatory approach and building block methodology may overlook the industry’s ability to pay and attempt through excessive charges to recover sunk costs (such as the land value) which do not have an impact on the port’s commercial viability.

It should be noted that Sydney is an expensive port relative to other major port destinations around the world and that the site occupation charge has significantly increased over a short period of time. In addition there are a range of port and non-port charges including government fees/taxes on top of the site occupation charge. Each passenger will pay on average of about $130 in taxes and charges before they even step on board a ship for their cruise holiday.

As a truly global business with mobile assets deployed to meet market conditions and commercial needs, decisions about ship deployment are assessed on a global basis against a wide range of demand and supply-led and cost base factors. As a result, ports with substantially higher fees and charges will likely, over the long term and without any adjustment, lose ground to more cost competitive ports and observe cruise ship deployment reduce over time.

In this context, there is therefore a risk that excessive port fees and charges may have the unintended consequence of removing cruise ship capacity from Sydney and reducing the utilisation of the related cruise ship infrastructure.

Impact of charges

Port charges for cruise ship operators are a critically important issue which have the potential to impact demand and investment, and the benefits cruising delivers to NSW. It is worth reiterating that:

Cruise-ship demand is sensitive to price — excessive prices will reduce demand;

Price instability and a poor price mechanism will deter local industry investment and compromise

industry growth and sustainability;

Site occupation charges are in addition to other charges, which are effectively taxes.

The cruise industry should only meet the efficient costs of services being provided. Charges in excess of the efficient costs will result in a reduction in the level of service — in this case a reduction in the volume of cruise ships calling on Sydney Harbour as ships are relocated to markets with more economically efficient pricing model.


The potential for excessive charges to create market distortions is significant for several reasons. Firstly it adds to the overall, market-distorting, tax burden levied on the cruise industry and its passengers which includes:

Australian Passenger Movement Charge, a federal charge imposed on persons departing Australia

equivalent to $55 per passenger;

A range of other port related charges that contribute to the servicing of the ship at embarkation and

disembarkation. These charges represent approximately $78 per passenger.

In addition, other taxes such as coastal tax or GST are applicable on domestic voyages. Voyages to New Zealand also attract a Border Control Levy of more than $20 per passenger.

Finally, uncertainty of charging and the charging mechanism will impact on the future cruise industry’s investment in Sydney.

Current port charges

Port charges in Sydney have now reached an unprecedented level. In 2016, it costs Carnival, for an average occupancy ship of 3,100 passengers, A$410k to call at Sydney Harbour. Of this amount, the site occupancy charge (A$93k, i.e. A$30 per passenger) is the second largest component, after the federal tax that is the Passenger Movement Charge.

It is also important to note that the cruise industry has operated in a cost volatile environment recently as a result of pricing revisions to the site occupation charge, which has increased by 900% in 3 years. Carnival understands PANSW plans to raise the site occupation from A$30 to A$35 per passenger in coming years, which would equate to an increase of more than a 1,000% when compared to the 2012 charge.

International benchmarks

Sydney Port charges are among the highest in the world if not the highest. Carnival has undertaken a comparative analysis of port costs for a sample of other ports around the world. This analysis, illustrated below, clearly highlights how uncompetitive Sydney is as a cruise port today, with overseas ports being 30% to 50% cheaper than Sydney.


The Alaskan experience

Alaska is an example of the extent of sensitivity of supply to increases in price. The cruise industry provides about 60 per cent of the total number of visitors to Alaska. In 2006, Alaska introduced a head tax of $46 per passenger. Itineraries had been set for the following two years’ sailings but in 2009/10 the impact of the prices increase was felt. Cruise traffic reduced by about 15 per cent driven by a drop in demand from guests asked to pay the higher fees.1 Cruise ships had simply been deployed to other markets around the world.

The impact on local businesses and communities was detrimental. In response, by 2010, the Government lowered the tax to revive the industry.

Economic benefits may be lost

The regulatory approach and building block methodology for site occupation charge setting may overlook the impact of cruising to the local economy and the adverse impact of excessive volatile pricing for port infrastructure and services in Sydney to the NSW economy.

Cruising delivers significant direct and indirect economic benefits. In 2014/15, the cruise industry contributed $3.6 billion to the Australian economy, predominantly in NSW as the country’s major cruise hub. Carnival Australia has demonstrated a historic commitment to the development of the cruise industry in the region.

As the largest user of Sydney cruise terminals, Carnival is a significant economic contributor to the NSW economy through passenger/crew spend, local employment, supplier arrangements with local and regional providores, as well as marketing and advertising Sydney / NSW / Australia as a tourism destination. Every time a Sydney-based ship turns around, passenger/crew spend pre and post cruise, port services, ship maintenance services and the food/beverage supply chain represent significant economic activity for the NSW economy. For example, the agriculture sector is a major beneficiary of cruising with up to 200 pallets of goods, including large quantities of fruit and vegetables, beef and poultry and dairy, loaded at each ship turn-around.

1 Alaska Cruise Association 2010, Alaska Visitor Industry Summer 2010 Report, November 2010.


In addition, Sydney and NSW benefit from significant economic externalities as a net importer of interstate and international passengers with approximately 45% of Carnival passengers sailing from Sydney coming from states other than NSW. Similarly, cruising competes directly with land based offerings in international markets (e.g. Indonesia, Fiji) and NSW benefits consequently from the sustained growth of cruising as the ships’ supply chain maintains part of the consumer expenditure in the local market.

These positive externalities would not occur without the existence of the cruise ship industry at Sydney Harbour. Continued local investment by cruise operators depends to a large extent on there being long term certainty, stability and reasonableness in pricing and access arrangements for port infrastructure and services in Sydney.

A five year determination cycle is too short

Carnival considers that IPART’s proposed five-year determination cycle does not adequately account for the long-lead times associated with cruise itinerary planning, marketing and booking as well as the planning and construction required for building a new ship. This process, from initial planning to the cruise actually taking place can be three to five years or longer with itineraries announced two years in advance of sailing.

Ideally, fees such as the site occupation charges should be known at the time the cruise prices are advertised, especially as increases in fees cannot easily be passed through to customers for two reasons:

- Sensitivity of customers to price increases in discretionary services

- Requirements in this jurisdiction that government charges be included in the total advertised ticket

price. In other parts of the world, port charges are separated out in advertising, however, the single

pricing requirements under Australian consumer law do not allow this to happen.

Pricing should be simple

We do not support the proposed use of two-part tariffs or auctions. Carnival is concerned that any proposal to increase prices as a demand management mechanism (especially in the peak season) has the potential to make some cruise itineraries – especially those leveraging off year round home-porting from Sydney – uneconomic. This is because home port ships also require continuous access to a berth during these peak periods and there is a risk that increases in charges during peak periods will impact on the viability of home port ships. Cruising is a capital intensive, low return business and seasonal pricing would introduce more risk.

In addition, auctions in particular are highly complex and would add a significant additional administrative burden to the itinerary planning process, particularly for world cruises where Sydney is one of many ports of call in a long international voyage (typically 75 to more than 100 days).

Conversely a negotiated price provides both parties with clarity around cost and duration. Importantly, from a passenger perspective, this certainty ensures operators can develop and commit to itineraries and deliver on its contractual commitment with guests.

Pricing is just one of several mechanisms or variables that can be manipulated to administer the allocation of a scarce or oversubscribed resource. The capacity constraints outlined above have been known since a review of port needs was completed in 2011.


Pricing and booking process review are interdependent

We note that PANSW is undertaking a concurrent review of the booking process for berth allocation. The PANSW booking process and IPART’s pricing review are interdependent and we urge that IPART give consideration to PANSW’s review to ensure that its recommendations are workable.

We also note that the Department of Premier & Cabinet is developing a long-term cruise plan. Although there are no terms of reference available, we understand it also relates to elements of the IPART review. Our hope is that the plan will be developed in consultation with the industry’s major players so that it is also workable and not a lost opportunity.

Impacts will be felt Australia wide

Sydney Harbour is a premium destination and Sydney is the busiest of all Australian ports. It is the gateway to Australia and, if policy and regulatory settings in Sydney / NSW compromise industry growth and sustainability, this becomes a national problem that affects the more than 20 regional cruising destinations Carnival visits.

The flow-on impacts to the national economy in this circumstance is potentially significant, because if infrastructure constraints or cost mean reduced ship volumes in Sydney, volume will reduce correspondingly in other Australian ports. In this way, Sydney’s policy and price setting play a central role in cruising’s role in the national economy.

While the cruise industry is expanding on a global scale we are concerned that the lack of capacity in Sydney will stifle the growth of the sector in Australia. This potentially is a huge opportunity cost for the NSW and the Australian economy in terms of failing to realise significant benefits that the cruise industry generates.

Special features of the cruise industry include:

There is only one effective berth for larger, modern ships east of the Harbour Bridge that is effectively fully utilised during peak season.

The Overseas Passenger Terminal at Circular Quay is almost at 100 per cent capacity during

December, January and February and approaching full capacity in the shoulder months of October,

November and March. Sydney also has among the highest port fees in the world.

The industry is highly seasonal with international ships heading to Australia for summer (these ships are in addition to the home-ported ships).

Sydney is Australia’s cruising gateway, so measures that serve to disincentivise cruises to Sydney impact industry growth around Australia, including at regional ports.

4 Responses to specific questions

Q1 Do you agree with our proposed approach to the review? Are there any alternative approaches that would better meet the terms of reference, or any other issues we should consider?

With regard to the site-occupation charges Carnival does not consider that the approach of setting maximum charges to recover costs across defined regulatory periods (each of which is subject to its own review) is appropriate for the cruise industry, nor does it adequately meet Carnival’s requirements / expectations around certainty of access and stability and visibility of pricing. We further note that is inconsistent with approaches adopted in ports elsewhere. Our preferred approach (discussed below) involves establishing long-term contracts with the focus on maximising the efficient use of the sites, per the international ‘norm’. This is considered to be international best practice.


With regard to the non-site occupation charges, we prefer to see the introduction of contestability and a form of light-handed regulation such as price monitoring.

Approach for site occupation charges

IPART’s proposed approach for setting site occupation charges focuses on applying a cost-based (building-block) model to determine prices. This model is most commonly applied in essential-services (e.g. water and energy). In such industries connection is effectively guaranteed and therefore any short-fall in revenue (i.e. in excess of usage charges) can be raised through connection charges with negligible risk of distorting use of the services.

However site occupation is not an essential service. Charges must be recovered through some form of usage charge (or option to use). As we have noted, the cruise industry is sensitive to charges and therefore a risk is that a focus on cost-recovery will lead to excessive usage charges and a reduction (distortion) in cruise ship capacity.

The regulatory building block method (if undertaken correctly) is nevertheless useful in increasing transparency and providing an indication of the efficient cost upon which to base maximum revenue that should be earned by PANSW.

The IPART approach also involves a 5 year review period. Such short-term review periods are not desirable for the cruise-line industry or indeed PANSW as it creates uncertainty over the medium-to-long term with price stability. This is an anathema to an industry which by its very nature deals in long lead times when it comes to making decisions about asset deployment.

Alternative approach for site occupation charges

Carnival Australia believes it is in the best interests of all stakeholders (PANSW, industry and consumers) if cruise ship operators were to establish long-term contracts with PANSW.

This approach is widely employed in comparable markets around the world and provides much-needed certainty around determining price over the long term.2 Furthermore, typical long-term agreements generally see cruise ship operators provide financial commitments to port operators in return for berthing rights. Such terms provide significant benefits for both parties: cruise ship operators are guaranteed access to the port infrastructure and see their past investments in the marketplace protected and port operators are guaranteed minimum returns, which in turn enhance their ability to keep investing and refinancing. Long term contracts also routinely address the issue of future infrastructure developments and provide for contributions or charging adjustments by cruise ship operators that support the return on investments required.

Carnival Australia acknowledges that pricing of port infrastructure and services for such a long term contract would still need to be agreed and that this might occur through direct negotiation with PANSW supported by an independent resolution process to ensure that there is no abuse (intended or otherwise) of the monopoly market position of the port operator.

Carnival Corporation has negotiated contracts, in one form or another, with the largest ports in the world. Carnival would be open to discussing the specifics of these arrangements and how they work with IPART on a commercial-in-confidence basis.

Box 1: Negotiated agreements between port operators ad cruise operators

2 There is also little downside to long-term arrangements as there are minimal ongoing costs associated with

providing site-occupation — the charges largely reflect a resource rent to owner of the site.


There are different types of port authorities in the world both in public and private ownership and different types of operating models. Agreements, however, present a number of commonalities and generally discuss the following aspects:

Period: 15 to 25 years + options to extend by 5-10 years with a maximum of 60 years.

Commitment: Cruise ship operators provide to port operators commitments in regards to the future

utilisation of and charges for port infrastructure and services. Commitments are generally made in

the form of minimum payment liabilities.

Access: Port operators provide cruise ship operators preferential berthing rights commensurate to

their commitment and in recognition of grandfathering rights and call hierarchy (homeporting vs

visiting) .

Access charging: Most models adopt a fixed and/or degressive variable (based on call/passenger

volumes) charges. Where commitment requires a minimum payment some arrangements offer the

possibility of crediting the surplus between actual and minimum payments towards future shortfall.

Future development: Cruise ship and port operators agree to key port infrastructure

developments/improvements and the funding or charging adjustments required by cruise ship

operators to provide for the commercial viability of the port operators. Ownership of infrastructure

developments generally remain or revert back to port operator by end of contract.

In Australia, a recent example of negotiation approach is provided by the recent decision by the ACCC to approve a negotiation based framework for allocation of port capacity at Viterra’s six South Australian bulk wheat ports. This decision means that Viterra’s previous auction system for allocating port capacity will be replaced by a negotiation based framework using Long Term Contracts as the primary allocation method from 2016-17. This approach provides a good example for a negotiation framework with some regulatory oversight.

Alternative port models

Our involvement is usually in cooperation with governmental entities and local operators and typically

includes providing development and management expertise and financial commitments that are connected

to long-term port usage and preferential berthing agreements. However, sometimes we provide direct

financial support or develop the port infrastructure ourselves, including the development and operation of

mixed-use commercial properties. Commercial property lease revenues are included in other cruise

revenues. We currently operate or are developing:

• Leased or owned port facilities or have interests in joint ventures that operate leased or owned port

facilities in Barcelona, Spain; Civitavecchia, Naples, Savona and Trieste, Italy; Juneau and

Ketchikan, Alaska; Long Beach, California and Marseilles, France for the benefit of our cruise brands

and

• Leased or owned port facilities that we have developed as destinations in Cozumel, Mexico; Grand

Turk, Turks & Caicos Islands; Puerto Plata, Dominican Republic and Roatán, Honduras; as well as

private island destinations in The Bahamas, Half Moon Cay and Princess Cays®, principally for the


benefit of our North America cruise brands. The facility in Puerto Plata, Dominican Republic, known

as Amber Cove, is a new port destination strategically located in the central Caribbean cruise region

and opened in October 2015.

In addition, we are involved with the development, enhancement and/or financing of government-owned

and operated cruise port facilities in Cape Canaveral, Fort Lauderdale and Miami, Florida; Galveston, Texas;

New Orleans, Louisiana; New York City, New York; San Juan, Puerto Rico and St. Maarten, Kingdom of the

Netherlands.

Other (non-site occupation charges)

Carnival is largely supportive of IPART’s approach for other non-site occupation charges.

With regard to these charges the key focus is ensuring focus on efficiency. It is appropriate that these charges are reviewed periodically. This IPART review will help to increase transparency in these charges.

We recommend a light-handed form of regulation, with the role of the regulator to be on monitoring of prices and ensuring transparency and providing arbitration if costs were judged to be higher than necessary.

Q2 What Port Authority services to cruise ships could be contestable? Are there any legislative or regulatory provisions that restrict the contestability of some services?

Carnival Australia supports the concept of making services contestable where it is cost effective to do so. Cost effectiveness means that the savings to Carnival Australia are greater than the administrative costs involved to implement contestability. An important factor is to ensure that there is an appropriate cost allocation arrangement in place between the different services to prevent cross-subsidies.

Carnival supports making pilotage services contestable. Currently, pilotage services are provided by a unique third party, which is a division of PANSW. Carnival believes there is room for greater competition in the market place and believes the service should be made contestable.

Carnival benefits from quasi contestability of security services and believes there is little scope for further improvement. Currently, security services are currently procured by PANSW through market tender but Carnival Australia sits on the selection panel. The benefit of transparency in this case satisfies Carnival.

Finally, Carnival is of the view that contestability for other services but mainly navigation and cleaning services is unlikely to drive an improved outcome. Carnival would however welcome further transparency to ensure services provided are efficient and not cross-subsidised.

Q3 Would it be more efficient to include the compulsory charges outlined in Table 4.1 in the site occupation charge? Which charges should or should not be included in the site occupation charge?

Carnival Australia does not support the proposal to bundle other discrete service charges into the site occupation charge. While providing a level of simplification, bundling of charges provides limited value to cruise ship operators but has the potential to hinder transparency and to over recover.

Carnival believes that site-occupation charges should be established in a long-term contract that provides certainty. It would be appropriate, however, that the other port-related charges are reviewed on a more regular basis in regards to their respective cost drivers.

It is important to understand that certain services performed routinely (e.g. security screening of passengers, x-raying luggage) vary by volume and/or type of call. For example, transit calls with no passenger exchange


do not require luggage x-raying whereas an international call or a home port call with passenger exchange will require luggage x-raying. Similarly, a transit call will not require check-in desks but inter porting call or a home port call will. A home port with passengers disembarking does not require a security check but embarking passengers do as will transit passengers. An international call would also have a mixed requirement for security check. Due to the difference in type of call, the duration of the service to be performed during the day can vary further creating complexity. In addition, as mentioned earlier, the type of brand and the operational philosophy of the cruise brand dictate what is needed, during what time of day based on operations and call type, and also based on the number of hours in port.

Q4 Do you agree with our proposed approach to share supplementary revenue equally between the Port Authority and customers?

Carnival supports the proposal for sharing supplementary revenue to allow reduction in costs of port infrastructure.

In this regards Carnival supports the provision of supplementary revenue generating services which are substantial, non-disruptive to operations and of benefit to passengers such as car parking and basic retail offerings. Carnival does not encourage more marginal revenue generating activities, which may detract from the number one priority of cruise terminals which is to process passengers and ready ships for their next voyage.

It is worth noting that long term contracts between cruise ship and port operators around the world routinely include revenue share provisions for supplementary activities, particularly when cruise line operators are likely to promote and provide commercial leads to the port operator for the provision of such services (e.g. transport, car parking).

Q5 Do you agree with our proposed review period of five years? If not, what period do you prefer and why?

Site occupation charges

We do not agree a proposed review period of five years is appropriate for pricing of site occupation. As indicated in our response to question 1 above, setting prices every five year period does not have much relevance in the cruise industry and is not an approach we have come across in in any other jurisdiction.

As discussed above, it is more appropriate for the cruise industry that long-term contracts are established as:

Investment decisions (both by the industry and PANSW) are made several years in advance and have

long-term implications

A key priority for the industry is on achieving a process that ensures price stability and certainty.

Other port charges

With regards to other port charges, a review period of five years appears reasonable.

Q6 Should land at terminals and berthing precincts be valued based on existing use or most valuable use?

Fundamentally, Carnival does not support the valuation of the land as it finds little relevance in regards to IPART’s terms of reference. In the current context where IPART seeks greater efficiencies in the utilisation of


assets / provisions of services; and looks to establish the commercial viability of PANSW, the purpose of this pricing review should be to recover effective costs.

If the scope of this exercise was to consider alternate uses of current sites (and alternative cruise sites), it would then make sense for IPART to consider the value of the land and the trade-offs involved in site redevelopments. Such an approach would then inform whether current cruise infrastructure provides for an optimal outcome but that is not the case here.

As a matter of methodology, Carnival does not support valuing assets using ‘existing use’. It is not appropriate to value land at existing-use as it results in a circular argument. That is, value depends on prices charged, but land-value is used in the regulatory building block which is used to calculate prices.

It is appropriate that land be valued at no more than the opportunity cost of the land. However, the opportunity cost of the land should reflect the feasible use of the land, which should be noted has already been paid for. In the case of the OPT, Carnival believes there is no feasible alternative use as the OPT is an asset with strategic tourist importance to Sydney. Even if home-based cruises were allocated to another site/port, the OPT would still be desired as a cruise terminal by international ships. Moving international ships to any other location would likely result in lower visitation and a substantial destruction of value on local tourism in the Rocks/Circular Quay precinct.

As there is no feasible alternative use, the relevant opportunity cost should be zero. This approach of zero charging is consistent with the valuation of strategic land for other transport services. For example, we note that IPART in a review of the Aspects of the NSW Rail Access Regime3 supported valuing ‘the corridor formation as vested to’ the Rail Access Corporation at zero cost. Similarly for the purposes assessing the rail access charges for Australian Rail Track Corporation (ARTC) network, there is no allowance for land value.

Carnival, however, believes care is required. IPART has proposed to review the Port Authority’s valuation which is based on existing use and the Valuer-General’s methodology for determining land values. These values are conducted for accounting and statutory purposes but may not be relevant for economic regulatory purposes.

The risk of using market value for the land is that it may increase the site occupation charge to such a degree that would make cruising out of Sydney Harbour uneconomic – thus distorting the utilisation of port cruise infrastructure. A value above this cost will have the effect of a tax on the industry, which as discussed earlier will risk causing a reduction in cruise services.

Q7 Do you agree with our proposed approach to valuing the initial asset base and allocating shared assets? Are there other approaches or issues we should consider?

The initial valuation of assets should only represent prudent and efficient costs. This is consistent with the regulatory building block approach and the requirements in the terms of reference for this review.

We are concerned that a number of prior investments have not been efficient and if these inefficient costs are incorporated into the initial asset base the initial asset values will be excessive.

We are particularly concerned with the White Bay investment. In this regard;

Investment in White Bay was a result of the Barangaroo re-development. It was not driven by

industry. The report by JBA Planning for Sydney Ports Corporation on “responses to Submission

3 See p. 26 of http://www.ipart.nsw.gov.au/files/sharedassets/website/trimholdingbay/ipart_final_report_-

_aspects_of_the_nsw_rail_access_regime_-_29_april_1999_pdf_version.pdf

http://www.ipart.nsw.gov.au/files/sharedassets/website/trimholdingbay/ipart_final_report_-_aspects_of_the_nsw_rail_access_regime_-_29_april_1999_pdf_version.pdf

http://www.ipart.nsw.gov.au/files/sharedassets/website/trimholdingbay/ipart_final_report_-_aspects_of_the_nsw_rail_access_regime_-_29_april_1999_pdf_version.pdf


Report”4 details Carnival Australia’s concerns at the time and the responses by Sydney Ports

Corporation. Of note Carnival Australia:

o clearly stated “its preference for the terminal to stay at Darling Harbour / Barangaroo.”

o raised the concern “that the White Bay facility will result in increased operating costs”, and

o expressed the concern that “[…] the additional costs of developing this facility will be passed

on the industry, increasing costs and affecting growth.”

There was no public cost-benefit case undertaken on the project.

The investment cost blew out. The initial project application was for $37 million.5 The final cost is

reported as $57 million.

In addition, the Barangaroo Delivery Authority paid for the White Bay development to remove ships

from Barangaroo.

Given the above, Carnival does not think it is appropriate that PANSW expect to realise a normal return and believes it is more appropriate and (given the impact on industry) more efficient that a low valuation be used for the White Bay assets.6

Carnival notes that IPART has in prior decisions made adjustments to allowable revenue to reflect that investments have not been efficient and/or made on a commercial basis. For example, in IPART’s 1999 determination on developer charges for water agencies in and around Sydney,7 IPART determined that the return on assets constructed pre-1996 should be lower (3% for Sydney and Hunter and 0% for Gosford and Wyong) as the agencies “did not anticipate obtaining a ‘commercial return’ on those assets.” (p. 19). An approach with a similar impact would be to adjust the value of the asset base.

Method of valuation

Currently, PANSW values buildings at current market prices for existing use; and roads, wharves and jetties are valued at depreciated replacement costs. IPART has indicated that it will be reviewing Port Authority’s valuations of all non-land assets, including buildings, roads, wharves and jetties and that it will be considering three different valuation methods.

Depreciated historic/actual cost method is a common approach for valuing assets for businesses operating in a competitive environment but may not be appropriate for valuing PANSW’s assets. PANSW as a monopoly was not subject to market competition and related commercial disciplines. Up until this review, its operations have not been subject to regulatory scrutiny either. Therefore it has faced limited if any incentives to be prudent and efficient in the way it has purchased assets.

Regulatory agencies in Australia, particularly IPART and ACCC have applied depreciated optimised replacement cost (DORC) to the valuation of gas pipelines, electricity transmission networks, port facilities, rail networks, airports and other natural monopoly infrastructure. [Lonegan 2006]

The DORC method optimises and values the asset based on the most efficient way to deliver the required services; applies standardised Modern Equivalent Asset values, standardised service lives, and standardised

4 See section 3.0 pp. 23 of JBA Planning “White Bay Cruise Passenger Terminal Response to Submissions Report”,

December 2010. Available at http://www.sydneyports.com.au/__data/assets/pdf_file/0020/15761/Submissions_Report.pdf 5 http://www.sydneyports.com.au/__data/assets/pdf_file/0009/15759/Project_Application.pdf

6 We recognise that this will result in a write-off of the inefficient component of the investment.

7 Developer Charges from 1 October 2000, Sydney Water Corporation, Hunter Water Corporation and the

councils for Gosford City and Wyong Shire council, Determination No 9, 2000.

http://www.sydneyports.com.au/__data/assets/pdf_file/0020/15761/Submissions_Report.pdf

http://www.sydneyports.com.au/__data/assets/pdf_file/0009/15759/Project_Application.pdf


depreciation rules. It applies an engineering based assessment that is useful for measuring the economic value of an asset. DORC is preferable to the Optimised replacement cost method as it allows for depreciation of the asset.

We recognise that DORC is commonly used in Australia to value assets but our concerns relate to the potential for DORC to produce inflated asset values especially for long-lived wharves and jetties. The DORC methodology has been criticised for being subjective and unauditable.8

Allocating costs of shared assets

It is appropriate that shared assets be identified and allocated based on a reasonable cost driver and Carnival Australia supports the allocation of shared costs services provided to cruise ships and non-cruise ships. The common approach to cost allocation is to identify the cost driver or causation of the cost. In the case of allocating costs between different services, there is not a clear cost driver

We imagine that the level of shared assets would be limited and IPART has not identified which land or property assets are shared between the passenger and commercial ships. In Sydney Harbour, OPT and White Bay (5) are dedicated for passenger cruises meaning that the costs can be directly attributed to the cruise ships. White Bay 4 is likely to be a shared asset.

There would also be shared operating costs that relate to PANSW’s corporate costs.

Navigation and pilotage services are shared between passenger and commercial ships. Currently these services are charged on a tonnage basis. This would be one simple approach given that the information is already being collected on the tonnage of each ship entering Sydney Harbour.

Q8 Do you agree with our proposed approach to determining the industry-specific WACC parameters? Are there any other comparable businesses we should consider?

Carnival does not agree with the determination of an industry specific WACC largely because of:

the lack of reliable and accurate comparables;

the significant impact of future PANSW commercial terms and pricing on future cruising

activity and PANSW’s capital structure.

Firstly, Carnival considers there are no appropriate comparables enabling the estimation of a reliable and accurate specific cruise industry equity beta. To Carnival’s knowledge, there is no port operator anywhere in the world serving the sole needs of cruise ship operators. Furthermore, among all infrastructure companies servicing other types of transport or hospitality companies, none are good proxies. Cruise companies are unique in that they combine transport, hospitality and entertainment services. The case of using airports as a benchmark is tempting but flawed to the extent that airlines only provide transport services.

Secondly, the WACC used should be commensurate with the risk faced by PANSW and the level of gearing ratio required by cruise infrastructure investments. As such, the appropriate WACC parameters depend on the commercial terms and pricing structure adopted by PANSW. As highlighted earlier in this submission, long-term contracts between cruise ship operators and PANSW largely mitigate the volume risk and provide for cruise ship operators to potentially fund future infrastructure investments, hence reducing the need for debt funding by the port. On the other hand, attempting to recover costs by charging uncommitted parties excessive charges will likely increase PANSW’s risk profile and impact its future capital structure. There is therefore an element of circularity in the approach which makes the analysis challenging.

8 Johnstone, 2003, p. 11


Attempting to set an industry-specific equity beta and WACC would be a highly subjective exercise and likely lead to erroneous results. In addition, Carnival questions whether the marginal impact of the cruising industry on PANSW’s revenue is likely to significantly impact its risk profile and the associated return expectations.

In the event IPART were to go forward with a specific industry WACC determination, it is important to understand the following:

Cruise activity in Australia has grown by approximately 20% year on year for the last ten years

without regard for economic downturns to date.

To Carnival’s knowledge, all major cruise ship operators in the region have operated as going

concerns for the last ten years

There have been no major shift in the type of capacity deployed and the passenger segments served

in Australia

Payment by cruise ship operators to port operators is almost completely independent of economic

market conditions. This is because:

o Ship deployment decisions are made several years out of sailing

o Itineraries are generally published and made available for sale 18 months to two years out of

sailing

o Cruise ship operators are incentivised to commit to their itineraries to capture auxiliary

revenue realised on board the ships

Carnival’s financial profile signals limited credit risk for port operators. Carnival’s debt is considered

of investment grade by both Standard & Poor’s and Moody’s.

The asset beta associated with ports maintaining cruise shipping under a long term contract is likely

to be significantly lower than that of commercial ports considering the volume of shipping traffic in

commercial ports is closely related to the amount of economic activity.

Finally, as discussed in our response to Q7, we believe that some investments, most notably for White Bay, were not efficient and that for White Bay a commercial return on the investment was not considered at the time of investment. We note that in the past IPART, in valuing assets held by Hunter Water and Sydney Water has applied a lower discount rate to reflect that the agency did not anticipate obtaining a ‘commercial return’ on those assets.

Q9 Do you agree with our overall proposed implementation of the building block model? Are there any other issues we should consider?

Our company operates globally and the regulatory building block approach is not consistent with any approach used anywhere in the world for servicing the cruising industry. We do not consider the approach suited to handle the complexities of long term requirements for slot allocations in the cruise ship sector.

Our key concerns are

The regulatory building-block model approach is common in essential services where customer

connection is effectively assured. Cruise ports are not an essential service and demand is

discretionary. Cruise ships are mobile assets and the cruise ship owners continually revise itineraries

to ensure suitable returns are achieved at a global level. If returns fall below thresholds, ships are re-

deployed to other ports if revenue or cost inputs (including port service prices) become

uncommercial.


Including an “allowance for a return of assets” will unfairly increase the notional revenue required by

PANSW. Future investments in the terminal should be undertaken at that time and not assumed.

Long term contracts can incorporate such additional investments through appropriate commercial

terms.

The regulatory building block approach does not factor in any form of incentive to cruise lines to

bring higher volumes of cruise passengers to Sydney. Longer term contracts will incorporate such

incentives in recognition of the sunk costs made and the economic benefits for Sydney.

As such, bilateral negotiations to establish long-term contracts are a feasible option although we

acknowledge the need for some form of dispute resolution mechanism in place to protect the

imputed underwrite of investment made by cruise ship operators.

The regulatory building block method if undertaken correctly will provide useful information that can

provide a starting point for negotiations with the PANSW (or NSW Government). This will allow an

opportunity to identify the link between the bearable returns of the cruise lines and for the PANSW.

With regard to other (not-site occupations charges) the regulatory building block approach will be useful in aiding transparency as to the efficient costs of providing services.

Q10 Are there other sources of information or other issues we should consider in deciding on forecasts of cruise ship visits? Is there a need for a mechanism to manage demand risk?

While ship visits are an important driver of activity, passenger numbers is probably the better driver when forecasting future revenue under the current price structure (the site occupation fee being charged on a per passenger basis). Carnival suggests IPART consider both metrics.

In the short-term the volume of cruise ship visits and passenger numbers can be forecast with reasonable certainty as cruise itineraries are determined and port bookings made 2-3 years in advance.

In the longer term, forecasting is significantly more difficult for a number of reasons:

Mobility of assets – Ships deployments are continuously assessed on the basis of profitability. As

stated previously in this submission, geographic arbitrage is common and motivates redeployment

whenever a particular market/port becomes uncompetitive compared to another.

Ship type / size – Ships vary in type and size/occupancy depending on the cruise brand, itinerary type

and market segment. For example, ultra-luxury Seabourn branded ships have a capacity of less than

600 passengers whereas premium Holland America branded ships may have a capacity of 2,500

passengers. The composition of ship type and size in the market is also constantly assessed by cruise

ship operators so as to best meet the evolving demand of various passenger segments in the market.

It is also worth noting the general trend that sees cruise ship operators move to larger ships. For

example, P&O Cruises Australia will homeport in Australia a new ship in 2020, which will carry 4,200

passengers compared with about 2000 passenger occupancy in its existing fleet. This trend will have

a very significant impact on passenger volume forecasts.

Consequently, past trends in cruise traffic are not a good indicator of future cruise ship visits or passenger numbers. With IPART looking at ship visit and/or passenger number forecasts to determine PANSW’s appropriate charges, Carnival is concerned that IPART’s flawed assumptions may lead to the justifications for excessive charges and future over-recovery of costs by PANSW.


Again, Carnival is of the view that long term contracts between cruise ship operators and PANSW negate the need for cruise ship visits / passenger number forecasts and are likely to drive a much improved outcome to both cruise ship and port operators. Indeed, common provisions of such long term contracts (refer to box 1 in this document) highlight how through commitments, cruise ship operators can mitigate demand risk for port operators while degressive charging mitigates the risk of over-recovery of costs when cruise demand is higher than expected.

In regards to White Bay, as stated previously in this submission, it is important to understand that by virtue of its location the site is not accessible to the large ships. As cruise ship operators progressively retire and replace ships with larger ships, the decision to locate a port terminal at White Bay means that the site is limited in its capacity to be accessed today and likely to see ship visits drop in the future. For this reason, it is unreasonable for PANSW to expect a normal level of return on its investment in the White Bay facility. Carnival is of the view that low ship visit forecasts likely to be estimated by IPART for White Bay should not be used as the driver for cost recovery and price setting.

Q11 Do you agree with our proposed criteria for assessing the options for a price structure or pricing mechanism? Are there any other criteria we should consider?

As discussed earlier in this submission, Carnival believes the criteria with regard to site occupation charges should focus on:

providing certainty (over access and charges) in the long-term,

maximising utilisation of the port infrastructure throughout the year,

reflecting efficient costs of providing infrastructure and services,

limiting cost over-recovery on poor investment decisions and higher than expected industry growth,

maintaining competitiveness of Sydney against other international markets/ports, and

maximising the benefits of the cruise industry to the NSW economy.

Carnival’s proposal for a negotiated approach and long-term contracts is consistent with these criteria.

With regard to IPART criteria summarised in box 2, Carnival has the following comments:

Box 2 IPART proposed criteria for assessing the options for a price structure or pricing mechanism

IPART has proposed the following criteria

1. Recover the Port Authority’s revenue requirement.

2. Provide incentives for the Port Authority to improve the allocative efficiency of current cruise

infrastructure.

3. Provide incentives for efficient future expenditure.

4. Provide a greater connection between costs and prices by removing cross-subsidies between the

cruise and commercial shipping; navigation, pilotage and other cruise services; and between

terminals where possible.

5. Provide certainty for stakeholders.

6. Are administratively simple and transparent.


Criterion 1 - ‘Recover the revenue requirement’ – Carnival believes that the criterion should be on

ensuring that revenue recover effective and efficient costs to ensure PANSW is commercially viable.

PANSW should not expect to recover a return on the land value at OPT or a normal return on

investments made at White Bay.

Criterion 2 – ‘Improve the allocative efficiency of infrastructure’- Carnival believes that means other

than pricing such as contracted port commitment and preferential berthing rights can encourage

efficient use of cruise infrastructure should be recognised.

Criterion 3 – ‘Incentivise efficient future expenditure’- Carnival believes that the issue major future

expenditure can be addressed through long term contracts with cruise line operators funding these

investments or agreeing to charging adjustments to recover the related return of/on asset.

Q12 What are your views on the three preliminary options for a price structure or pricing mechanism – the current site occupation charge structure; a two-part tariff; and an auction system? Are there any other benefits or limitations we have not considered? Are there other alternatives you would like to see considered?

Our preferred approach involves a long-term agreement between cruise ship operators and PANSW for setting of site-occupation charges. In particular we do not support the proposed use of two-part tariffs or auction approaches which would increase complexity to the itinerary planning process.

The current site occupation charge structure

The current site occupation charge is levied on a per-passenger per day basis. This is a common approach used in the industry.

Our primary concerns with the current structure are around the level of the charge, and the opaque and ad hoc manner it has been set in the past.

The current charge of $30 per passenger at OPT and White Bay 5 together with the other range of charges makes Sydney a high cost destination relative to other international ports. The level of this charge is a concern to Carnival.

Site occupation charges rose from $20 to $30 between July 2013 and July 2015 – a 50 percent increase in per passenger fees is unheard of over a period of only two years. Over this same period, the top homeports in the world (Miami and Fort Lauderdale) increased their usage fees by less than 3% and 7%, respectively. Both rates are also less than $15.00 per movement (embark, debark, transit) and are the most in-demand berths globally. The largest port in Europe, Barcelona (see table below), did not increase fee at all, in fact for most part other than mooring have reduced or remained the same at a level significantly below that of those imposed in Sydney.


The relativity of charges between White Bay and OPT are also a concern. Larger ships can only dock at OPT and therefore the OPT is in much higher demand. Accordingly the White Bay 5 per-passenger fee should be adjusted accordingly to incentivise its usage year-round.

Two part tariff

The IPART comment about a two-part tariff price structure (IPART, 2016, p. 43) is not common in the cruise industry. We do not support the adoption of a two-part tariff as it would add complexity to forward planning of itineraries.

Carnival is concerned that any proposal to increase prices as a demand management mechanism (especially in the peak season) has the potential to make some cruise itineraries – especially those leveraging off year round home-porting from Sydney – uneconomic. This is because home port ships also require continuous access to a berth and there is a risk that increases in charges during peak periods will impact on the viability of home port ships. Cruising is a capital intensive, low return business and seasonal pricing would introduce more risk.

Auction system

We strongly disagree with the auction process proposed by IPART. An auction would introduce significant complexity to the ship deployment and itinerary planning process. It is critical to understand that an auction would create a circular process since port costs drive ship deployment / itinerary planning decisions. An auction would then require the ship deployment/planning decisions to inform the decision to go to Auction, port cost and port booking. The auction also adds significant complexity to itinerary planning in the context of Sydney as only one port among many in any voyage. An auction process would thereby significantly impact on the ability of a cruise operator to manage its operations.

An auction process also creates uncertainty for port infrastructure availability and potentially threatens continuity of operations and well established cruise ship operators market shares and may significantly affect the value of past investments made in marketing, sales, and distribution in the market place (80 years’ worth of in the case of P&O Australia).

TRANSIT 2013 2014 2015

Terminal Fee € 2.79 per pax and day € 2.79 per pax and day € 2.79 per pax and day

Security Fee € 0.471 per pax and day € 0.471 per pax and day € 0.471 per pax and day

Passenger Fee € 2.55 per pax € 2.4225 per pax € 2.4225 per pax

T/A 2013 2014 2015

Terminal Fee Embark € 2.79 per pax and day € 2.79 per pax and day € 2.79 per pax and day

Terminal Fee Disembark € 2.79 per pax and day € 2.79 per pax and day € 2.79 per pax and day

Security Fee Embark € 0.471 per pax and day € 0.471 per pax and day € 0.471 per pax and day

Security Fee Disembark € 0.471 per pax and day € 0.471 per pax and day € 0.471 per pax and day

Passenger Tax Embark € 4.08 per pax € 3.876 per pax € 3.876 per pax

Passenger Tax Disembark € 4.08 per pax € 3.876 per pax € 3.876 per pax

2013 2014 2015

Pilotage IN (0.013619*GT) + €159.28 (0.013619*GT) + €159.28 (0.013619*GT) + €159.28

Pilotage OUT (0.013619*GT) + €159.28 (0.013619*GT) + €159.28 (0.013619*GT) + €159.28

Mooring 0.012889 x GT 0.013147*GT 0.013147*GT

Unmooring 0.012889 x GT 0.013147*GT 0.013147*GT

Waste Tax 80*((0.00012*GT)+12) 80*((0.00012*GT)+12) 80*((0.00012*GT)+12)

Light Dues GT x 0.01015 GT x € 0.01995 GT x € 0.01995

Source: http://www.tasasportuarias.es/; http://www.portdebarcelona.cat/es/


Finally, it is worth noting that an auction as pricing mechanism that allocates limited capacity in the peak season according to the value that customers place on slots is unheard of in the cruise industry.

We note that in South Australia, Viterra attempted an auction process for a commercial port without success. In December 2015, the Viterra auction process was replaced by the Long Term Agreements.9 The Long Term Agreement uses a negotiation framework as the primary allocation method. The previous auction was considered inappropriate because it was complex and took up too many resources for customers, added financial risk including negative impact on customer balance sheets; some customers stopped participating; and did not allow for long term planning.10

Need for stable pricing

Sydney port capacity is becoming limited and we are concerned that any proposal to increase prices to manage demand – especially in the peak season will make some of our cruises – in particular our year round home-porting from Sydney uneconomic. Home port ships need continuous access to a berth and there is a risk that increases in charges during peak periods will impact on the viability of home port ships. Cruising is a capital intensive, low return business and seasonal pricing would introduce more risk.

A reduction in year round home-porting would lower the use of the terminals, especially from White Bay, in non-peak periods. This would lead to a reduction in economic efficiency. Consistent with IPART’s terms of reference the focus of the site occupation charges should be on optimising use of the facilities. Given the importance of home-porting, there needs to be stable and certain prices over a long period.

Q13 What sort of notice or transition period would be required to implement a new price structure or pricing mechanism?

It is critical for the industry to establish certainty around access to and pricing of port infrastructure and services. Carnival is looking for a transition that will recognise its long-standing commitment to the NSW cruise industry.

Further, cruise ship operators make ship deployments and itinerary planning decisions as well as port bookings at least 18-24 months in advance. Consequently, Carnival estimates that there should be a period of three to five years in advance of any introduced changes to allow for proper consideration and planning in the deployment process.

PANSW is currently undertaking a review of the booking process for the allocation of berths. The PANSW booking process and IPART’s pricing review are interdependent and we urge that IPART give consideration to PANSW’s review to ensure that its recommendations are workable.

Q14 Should bookings for slots be based on shorter time periods than the current 24-hour slot? Are there any other methods to increase the number of ships that can berth at a terminal in peak times?

We do not support shortening the current 24 hour slot.

There are many variables that affect the movement of ships. Passenger disembarkation, embarkation, crew exchange, luggage movements, providoring, refuelling are the key activities involved. As a result, ships take

9 The Australian Competition and Consumer Commission has released a final decision to approve Viterra’s proposal to

introduce long term agreements (LTAs) to allocate port capacity at its six South Australian bulk wheat ports. 10

Refer to Viterra Frequently Asked Questions


between 8 – 12 hours to turn around depending on the size and number of guests. In addition, it needs to be considered that guests are on a holiday and embarking and disembarking represent part of the overall holiday experience, hence limiting the time of day/night when passenger exchange is preferred. Embarking and disembarking of guests can also not be simultaneous as ships are required to be cleaned.

Furthermore, ships also require barge access for refuelling and there are limitations on truck movements (required for providoring) at OPT. Similarly ships are restricted from moving to/from OPT at certain times of the day to accommodate ferry operations for commuters.

It is also very difficult to conceive that a day will comprise more than 1 slot of 12 hours, since cruise overnight calls are very limited due to the need for links to for example airports for guests to reach the port, navigational requirements to/from Sydney and weather conditions.

The reference to airport landing slots by IPART is misleading since cruise and aviation operations differ greatly, with the former offering a holiday experience whereas the latter is transport. Cruise terminal infrastructure is not an airport with multiple gates, runway slots and short turnaround times.

Q15 What type of non-Port Authority charges are incurred by cruise ships for a typical visit to Sydney Harbour? How much are these charges?

The main non-Port Authority charges, which will vary based on the size of the ship, include:

AMSA levy - ~A$9 per passenger;

Ground staff (passenger meet& greet) – ~A$5 per passenger

Baggage handling – ~A$5 per passenger

Stores provisioning – ~A$4 per passenger

Towage (tug boats) – ~A$3 per passenger ;

Equipment hire - $A$1 per passenger

Non port authority charges that impact the paying passenger also include taxes:

Australian Passenger Movement Charge, a federal charge imposed on persons departing Australia

equivalent to $55 per passenger;

These additional charges can be a significant proportion of a cruise fare. For example an 8 night international fare at $899 per person would be made up of ~$133 in port charges. This represents ~15% per cent of the total cost of a cruise fare.

In addition, other taxes such as coastal tax or GST are applicable on domestic voyages.

Q16 What are the external costs and benefits of cruise ships in Sydney Harbour?

Cruising delivers huge economic benefits to the local and regional areas where they are located. In 2014/15, the cruise industry contributed $3.6 billion to the Australian economy representing a growth of 11.6 per cent from the previous.11

The increased contribution to the economy comes from:

8.8% increase in passenger/crew visit days which now exceeds two million cruise visit days

11

Cruise Lines International Association, Cruise Tourism’s Contribution to the Australian Economy 2014-15, An Overview.


12.4% increase in direct passenger expenditure

11% increase in direct cruise line expenditure driven by rise in Australian deployments

9% increase in jobs generated by the cruise industry which is now around 15,000 FTEs.

Growth in overall cruise ship visit days by 1.7% which includes an 8.3% increase in the number of

home-ported cruise ships.

Sydney Harbour is an important destination and receives the most number of cruise visits of all Australian ports. It is the gateway to the Australian cruise industry. The NSW economy in particular benefits from the cruise industry.

In addition, Sydney and NSW benefit from significant economic externalities as a net importer of interstate and international passengers with approximately 45% of Carnival passengers sailing from Sydney coming from states other than NSW. Similarly, cruising competes directly with land based offerings in international markets (e.g. Indonesia, Fiji) and benefits consequently from the sustained growth of cruising as the ships’ supply chain maintains part of the consumer expenditure in the local market.

Globally the cruise industry is growing substantially but we are concerned that the lack of capacity in Sydney is likely to stifle the growth of the sector. This is a huge opportunity cost for the economy. In the case of ports, there are many factors that drive investment other than pricing signals and we urge a more strategic approach from governments to take advantage of the potential growth in the sector.

Q17 Are there any changes to the regulatory framework or reforms that would encourage more efficient operation of the passenger cruise terminals or provide savings or net benefits to the community?

Carnival Australia’s central concern is on resolving the substantive issues associated with pricing and access for site occupation to ensure the continued growth and sustainability of the industry.

Ends//

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